for prof washington watson

ECON 321 SPRING 2017:

INDIVIDUAL ASSIGNMENT 7 DUE MARCH 10th, 2017 BY THE START OF CLASS

Name SAMPLE

Student Number ANSWER

Group Name

Honor Code: I guarantee that all the answers in this assignment, except those for

the question specifically marked as a group discussion question, are entirely my

own work. I have cited any outside sources that I used to create these answers in

such a way that the TA or instructor can look them up.

Name or Signature for Honor Code: ______________________________________________

The table below is for TA use only.

Question Mark Out of

1 a 12 b 2

2

a 2 b 4 c 4 d 4

3 a 8 b 6

Bonus a 4 Total 42

1. [Reading] Read ONE of the following papers. You have a choice between a shorter, more

technical paper or a longer, easier-to-read one.

• ‘The Timing of Railway Construction on the Canadian Prairies’ (Technical, 13 pages)

• ‘Some Economic Issues Relating to Railroad Subsidies and the Evaluation of Land Grants’ (Easier to read, 21 pages)

a. Write a 3-2-1 report on one of the two papers above. Remember that you CAN’T

just copy-and-paste text from the paper. You need to either cite quotes properly, and explain why you chose them, or use your own words. (12 marks)

b. There are two versions of this question, one for each paper. Answer only the one related to the paper you chose. (2 marks):

i. Suggest a specific modification that would have to be made to the model in order to do this. (1 mark for the suggestion, 1 mark for explaining why it is necessary.) Consider a different situation, where you are trying to modify a standard demand model to deal with demand for beautiful surroundings (parks, clean air, friendly animals, nice sunsets, etc.). The standard inverse demand equation might look like P = F(Q). In this case, ‘Q’uantity would not be appropriate, since there’s no easy way to quantify beauty. A solution might be to replace the demand equation with a hedonic pricing equation, where the price consumers are willing to pay is a function of characteristics, rather than quantity: P = f(c1,c2,c3,c4) etc. where the ‘c’ stands for ‘characteristic’.

ii. ‘Economic Issues’: As discussed in class, the Canadian Pacific Railway received a grant of millions of acres of land from the Federal government. Based on what you have read in this article and learned in class, was a land grant of this size an appropriate incentive? If so, why? If not, what would have been a better incentive? Briefly explain your reasoning.

No sample answer for this one.

2. [‘Raphing] This question is meant to show you that you need to be careful when interpreting historical statistics, even when you THINK you have what you need! a. (2 marks) According to Green, “net railway income is the sum of wages and salaries,

interest and dividend payments, [rent payments] and net savings”. Net “Savings are defined as the difference between net corporate income and dividends paid out.” Use the data in this assignment’s companion Excel sheet to calculate net income (Wages and Salaries + Interest Payments + Dividend Payments + Rent Payments + Net Savings). You will have to calculate Net Savings as (Net Corporate Income – Dividends). Call this series ‘Net Income’. It should have values for every year from 1926 to 1976. In case you’re wondering, yes, the Dividends cancel out.

b. (4 marks) Green did not have access to this quality of data for his entire time period, so he had to make some assumptions. We’ll re-calculate our net income series using simplified versions of two of his assumptions:

i. Green found that the ratio of wages to operating expenses was very stable at around 59.1%, and used this relationship to estimate wages and salaries. (If operating expenses were $1000, wages were $591.) Calculate an estimated wage series for 1926 to 1970 by multiplying Operating Expenses by 0.591. Call it ‘Wages (Est.)’.

ii. Green did not have information on net corporate income before 1911, so he used net operating income to calculate net savings. Calculate an estimated net savings series for 1926 to 1970 as (Net Operating Income – Dividends). Call it ‘Net Savings (Est.)’.

iii. Use your results from i. and ii. to calculate an estimated net income series from 1926 to 1970. Call it ‘Net Income (Est.)’. (Use the same formula as in a., but replacing wages and net savings with their estimates from i. and ii.)

c. (4 marks) Plot Net Income (from a.), Net Income (Est.) (from b.), Net Corporate Income and Retained Income on a line graph. The vertical axis should be dollars, and the horizontal axis should be Year and stretch from 1926 to 1970. There should be 4 lines. As usual, make sure your chart, lines and axes have descriptive titles. If you’ve done this correctly, you should note that Net Corporate Income is much lower than either of your Net Income calculations, and that Retained Income is much closer to the value of Net Income (at least until 1956, but we’ll leave that to Question 3). I’ve plotted the graph below for randomized values, to give you an idea of the expected format:

$0

$500,000,000

$1,000,000,000

$1,500,000,000

$2,000,000,000

$2,500,000,000

$3,000,000,000

$3,500,000,000

$4,000,000,000

$4,500,000,000

$5,000,000,000

1 9

2 6

1 9

2 8

1 9

3 0

1 9

3 2

1 9

3 4

1 9

3 6

1 9

3 8

1 9

4 0

1 9

4 2

1 9

4 4

1 9

4 6

1 9

4 8

1 9

5 0

1 9

5 2

1 9

5 4

1 9

5 6

1 9

5 8

1 9

6 0

1 9

6 2

1 9

6 4

1 9

6 6

1 9

6 8

1 9

7 0

D o

lla rs

Year

CPR Net and Retained Income, 1926 - 1970

Net Income Net Income (Est.) Net Corporate Income Retained Income

d. (4 marks) For the period 1926 – 1970, do Green’s assumptions provide reasonable results? Explain briefly. For the results to be reasonable, three things have to be true:

i. Net Income and Net Income (Est.) are about the same value.

If you’re unsure about this, you might try calculating a measure of how

far apart Net Income and Net Income (Est.) are.

One possibility (not the only one): calculate the gap between the two as a

percentage of Net Income:

|(Net Income (Est.) – Net Income)/(Net Income)| x 100 = Gap

(‘Abs’ is ‘absolute value’. The Excel function for it is ABS().)

For this question, if this gap is greater than 20% of Net Income (value is

greater than 20), then we can say the two aren’t close. (Other thresholds

are also valid – I added this one to the sample answer for students who

want a default.)

If you find that they’re (for example) close for the first 20 years of data

but then grow farther apart, that’s a valid answer, too.

The example below uses randomized data:

Year Net Income Net Income (Est.) Gap (% of NI)

1930 80 97 21.3 1931 28 94 235.7 1932 36 42 16.7 1933 57 18 68.4 1934 31 2 93.5

How to read the above – let’s look at 1934.

(Net Income (Est.) – Net Income) = (2 – 31) = -29.

(Net Income (Est.) – Net Income)/Net Income x 100 = -29/31 x 100 = -93.5

Taking the absolute value, we find the gap is 93.5 % of Net Income for that year.

In the above example, only 1932 would have been ‘close’. We could therefore say with

confidence, if this were our full data set, that no, net income and its estimate are NOT about

the same value.

If you want to automate the process in the actual data set, you could use the highlight cell

rules technique in the sample answer to d.ii. to highlight Gaps greater than 20 in red. That

would allow you to spot problem areas quickly.

ii. When Net Income goes up/down, Net Income (Est.) goes up/down. While you can check this just by looking at the graph, it’s possible to do it more formally in Excel. (Not necessary for full marks, but some students might feel more comfortable with a quantitative solution.) Create two new columns in which you calculate the CHANGE in Net Income and Net Income (Est.). Create a third column where you multiply these changes together. If the desired condition is satisfied, the third column should be positive: if the two series go up together, you get (+) x (+) = (+). If they go down together, you get (-) x (-) = (+). You can then use Excel’s ‘highlight cells rule’ to color any negative cells in the third column red. This will allow you to quickly spot how many times the series DON’T go up or down together. Note: In the screenshots below I’m using randomized values to avoid giving away part of the answers.

Year Net

Income Net Income

(Est.) Change

(NI) Change

(NIE) Multiple

1930 80 97 1931 28 94 -52 -3 156

1932 36 42 8 -52 -416

1933 57 18 21 -24 -504

1934 31 2 -26 -16 416

How to read the above – let’s look at 1930 – 1931. Net Income (NI), fell from 80 to 28, so Change (NI) = 28 – 80 = 56. Net Income (Est.), (NIE), fell from 97 to 94, so Change (NIE) = 94 – 97 = -3. For our final ‘test’ column, Change (NI) x Change (NIE) = (-52) x (-3) = 156.

You can access this from ‘Conditional Formatting’ in the ‘Home’ Toolbar.

iii. Any difference between Net Income and Net Income (Est.) is stable: if Net Income and Net Income (Est.) are about 10% apart one year, then they are about 10% apart in all years. You do NOT need to graph anything for full marks in this question. This method is entirely optional, but some students might find it fun/simpler than trying to eyeball it. If you calculated the gap as suggested in the sample answer to part i), this is straightforward. You could even plot the gap as a line graph to see if it was constant – or perhaps, constant for some decades, and not constant for others:

Year Net Income Net Income (Est.) Gap (% of NI)

1930 80 97 21.3

1931 28 94 235.7

1932 36 42 16.7

1933 57 18 68.4

1934 31 2 93.5

In our sample data, the gap is definitely NOT constant.

0.0

50.0

100.0

150.0

200.0

250.0

1930 1931 1932 1933 1934

Gap (% of NI)

3. [Research] For this question, please refer to the Canadian Pacific Railway 1923 – 1970 report at

http://publications.gc.ca/site/eng/9.829634/publication.html

a. In your graph for Question 2, you should have noticed that Retained Income (or Retained Earnings) is a much better match for the Net Income you calculated than the actual Net Corporate Income that is included in the data. Knowing the above, explain why Net Corporate Income was so much lower than Net Income calculated using the Factor Payments approach. Also explain why Retained Earnings was (usually) much closer to the ‘correct’ Net Income value. (8 marks)

The first part of this question should be extremely easy to answer just based on the

formula you used to graph Net Income.

If you’re having trouble with the second part, consider the following thought

experiment:

Suppose, just by coincidence, Retained Earnings is EXACTLY equal to Net

Income (Factor Payments Approach) in the first year of your sample, 1926.

To calculate Retained Earnings for 1927, you’d add (Net Corporate Income –

Dividends) = Net Savings for 1927 to the Retained Income from 1926.

That being the case, what would have to be true about Wages/Salaries, Interest

Payments and Rent Payments in 1926 for Net Income (Factor Payments Approach)

to be exactly equal to Net Income in 1927?

b. After 1956, Retained Income no longer tracks Net Income very closely.

Use information from the report to explain why this is the case. (6 marks) [Hint: the Notes for Table 4, on page 18, may be useful.]

No sample answer for this one.

4. [Optional Bonus] As we learned in class, before its incorporation in 1886, the area that is now Vancouver included the settlements of Burrard Inlet, Granville and Hastings. Why is Vancouver named Vancouver, and not any of those three names? Explain, and provide a properly cited, reliable source for your claim. (4 marks)

Bonus question, so no sample answer.

Data for Question 2 (By Hand Version Only)

Year Wages and

Salaries Interest

Payments Dividend Payments

Rent Payments

1940 $1,329,453,600 $363,839,569 $80,936,651 $56,454,479

1941 $1,499,651,576 $324,099,365 $76,175,672 $53,217,827

1942 $1,687,394,864 $294,274,941 $73,578,774 $51,448,713

1943 $1,796,572,800 $270,491,035 $71,943,690 $50,503,258

1944 $2,100,144,264 $244,292,598 $260,225,627 $49,632,625

1945 $2,109,751,565 $225,468,879 $303,993,978 $47,341,052

1946 $2,191,214,298 $206,843,972 $291,053,869 $45,695,784

1947 $2,170,969,748 $164,617,838 $265,621,978 $32,185,380

1948 $2,259,720,305 $144,776,767 $231,856,472 $28,130,851

1949 $2,247,473,607 $128,682,438 $217,046,181 $24,385,275

Year Net Corporate

Income Operating Expenses

Net Operating Income

Retained Income

1940 $32,333,624 $2,922,220,483 $731,161,779 $2,311,926,985

1941 $519,059,749 $3,544,204,822 $992,235,366 $2,573,829,904

1942 $588,805,441 $3,972,647,018 $1,121,369,961 $2,936,427,502

1943 $613,220,110 $4,484,469,638 $1,210,085,598 $3,298,941,510

1944 $489,610,788 $4,756,592,307 $992,449,655 $3,551,671,102

1945 $441,223,739 $4,684,202,646 $854,828,862 $3,667,394,686

1946 $343,329,730 $4,296,312,942 $567,289,640 $3,676,159,915

1947 $397,590,500 $4,279,599,562 $539,921,988 $3,479,564,718

1948 $298,082,243 $4,134,978,649 $321,112,241 $2,140,768,728

1949 $312,841,390 $4,102,649,935 $325,902,986 $2,175,756,702

Useful References (UVic connection or VPN needed for free access)

Question 1 Frank D. Lewis and David R. Robinson, “The Timing of Railway Construction on the Canadian

Prairies,” The Canadian Journal of Economics, Vol. 17, No. 4, 1984, pp. 340 – 352.

Available at http://www.jstor.org/stable/134961

Stanley L. Engerman, “Some Economic Issues Relating to Railroad Subsidies and the Evaluation

of Land Grants,” The Journal of Economic History, Vol. 32, No. 2, 1972, pp. 443 – 463.

Available at http://www.jstor.org/stable/2116824

Norbert MacDonald, “The Canadian Pacific Railway and Vancouver’s Development to 1900,”

BC Studies, No. 35, 1977, pp. 3 – 35.

Available at http://ojs.library.ubc.ca/index.php/bcstudies/article/view/936

Les Munro, “Outline of History of the Canadian Pacific Railway’s Land Grants,” Canada’s

Petroleum Heritage, Alberta Online Encyclopedia, 2010.

Archived at http://wayback.archive-

it.org/2217/20101208163017/http://www.albertasource.ca/petroleum/featured_article/cpr_land_g

rants.html

Question 2

Alan Green, “Growth and Productivity Change in the Canadian Railway Sector, 1871 – 1926,”

Long-Term Factors in American Economic Growth, University of Chicago Press, 1986.

Archived at http://www.nber.org/chapters/c9694

Government of Canada, “Canadian Pacific Railway Company 1923 – 1970,” Dominion Bureau

of Statistics and Commerce, 1971.

http://publications.gc.ca/collections/collection_2017/statcan/52-202/CS52-202-1970-eng.pdf

Full series (1948 to 1970): http://publications.gc.ca/site/eng/9.829634/publication.html

Statistics Canada, Consumer Price Index – Historical Summary, http://www.statcan.gc.ca/tables-

tableaux/sum-som/l01/cst01/econ46a-eng.htm

Question 3

Government of Canada, “Canadian Pacific Railway Company 1923 – 1970,” Dominion Bureau

of Statistics and Commerce, 1971.

http://publications.gc.ca/collections/collection_2017/statcan/52-202/CS52-202-1970-eng.pdf

Full series (1948 to 1970): http://publications.gc.ca/site/eng/9.829634/publication.html

Retained Earnings (Investopedia): http://www.investopedia.com/terms/r/retainedearnings.asp

Net Income (Investopedia): http://www.investopedia.com/terms/n/netincome.asp

Mark Kennan, “How to Calculate Retained Earnings on a Balance Sheet,” Chron,

http://smallbusiness.chron.com/calculate-retained-earnings-balance-sheet-10597.html

Factor Payments (AmosWEB):

http://www.amosweb.com/cgi-bin/awb_nav.pl?s=wpd&c=dsp&k=factor+payments

Alan Green, “Growth and Productivity Change in the Canadian Railway Sector, 1871 – 1926,”

Long-Term Factors in American Economic Growth, University of Chicago Press, 1986.

Archived at http://www.nber.org/chapters/c9694